Banking in the Sharing Economy

Posted on September 11th, 2014

It’s probably not a surprise that the two companies most in the news these days for being innovative, for disrupting their respective industries and of course for earning rich rewards in the process have absolutely nothing to do with financial services. But as industry observers are increasingly pointing out, perhaps that’s the reason more in our field should be paying attention.

Both companies—specifically Uber and Airbnb—embody the consumer-friendly, app-driven, mobile-social-cloud business ethos of the moment. Both saw a huge opportunity that others had identified as a niche. And of course, both now have market evaluations that seem reasonable and ridiculous at the same time.

Take Uber, which launched barely five years ago and exists to connect riders to drivers through custom apps. Yes, it’s rapidly gained a global presence and millions of sworn adherents. But its most recent cash infusion of $1.2 billion marks its valuation at somewhere around $18 billion. It’s a fraction the size of Hertz, Avis or United Airlines and yet has a higher market value. And it gets better: some analysts believe its true value could be closer to $200 billion. (To be fair, other observers peg the number much lower.)

Then there’s Airbnb, which came to life just a year earlier and sells itself as a “trusted community marketplace for people to list, discover, and book unique accommodations around the world, online or from a mobile phone.” Again, there have been plenty of variations on this theme before, but many (like Digsville) have been limited to vacation home swaps. It was a niche market. . .until Airbnb came along. Now, it has the potential to blow a hole through the hospitality industry.

Moving forward, neither is going to stay in its current consumer environs. Both companies recently made deals with Concur Technologies, the expense-reporting service used by some 20,000 companies. Both are also refining their key ingredient, mobile applications, to appeal to business-specific users. It’s not at all difficult to see them refining their services even further, such as to meet the specific needs of professionals in particular vertical industries.

So what does all this have to do with banking? After all, didn’t we see these kinds inflated expectations during the dot-com era, and didn’t many of them go bust? That’s unquestionably true, but the reality is also more complicated.

First, while many dot-coms with huge market caps crashed and burned, quite a few didn’t (as the current war raging over Amazon’s business practices makes clear). More to the point, numerous established enterprises from the pre-Internet world also died a painful death at the same time. The ones that survived, even thrived, were the ones that changed with the times. And that’s really the lesson to be learned here.

A recent op-ed in American Banker makes the point that companies like Airbnb, for example, do so well because of their “use of personal narrative to drive a sense of belonging and community.” These startups engage with their customers and partners in a way that’s unprecedented and entirely current—driven by social media not just in the sense of channels but a new kind of collaboration. Indeed, it could be argued that awareness of their services has been raised more by technology-driven word of mouth than any kind of traditional marketing.

But there’s more to it than that. Uber and Airbnb, among others, are pillars of the emerging sharing economy, building more on others’ assets than their own. They thrive in a business universe that encourages openness in every area, from homes to data vaults.

For companies that, for reasons ranging from longtime operating practices to strict compliance mandates, have kept tight barriers around their information, this is a potential nightmare. It’s easy to say that banks and credit unions are mostly immune to market forces that buffet industries like hospitality and transportation. That’s true. But then again, for very different reasons, those industries probably thought the same thing.

A couple of decades ago, some financial services institutions had to be scramble to meet challenges from Internet-driven upstarts. Many changed willingly, and became stronger in the process. In the shared economy, it may be time to do that again.